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Global Monetary Policy Monitor

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Turbulence Pressures Emerging Central Banks

February 4, 2014

Monetary policy decisions were made in 16 countries under our coverage in January.

Monetary policy decisions were made in 16 countries under our coverage in January. Four nations lifted their benchmark interest rates: Brazil, Turkey, South Africa and India. In all cases, the hike was larger than expected by market consensus.  A worsening view of emerging economies, which pressured currencies in many countries, contributed to the move. Regarding Turkey, the central bank kept the rate unchanged in its regular meeting, but, following a negative reaction by markets, it increased the rate sharply in an extraordinary meeting held one week later.

In contrast, Hungary cut its benchmark rate by 15bps. Since August 2012, the Hungarian Central Bank has already cut its benchmark rate by 415 bps.

The risk-off mood also affected the currencies of Latin American countries with sound fundamentals, such as Chile, Mexico, Peru and Colombia, which could in turn influence their future monetary policy decisions. So far, we have maintained our monetary policy calls for those countries. The central banks of these four nations kept interest rates unchanged in January. In Chile, we expect the central bank to resume its monetary loosening cycle in February. In Colombia, the monetary policy committee still regards exchange-rate depreciation as positive for the economy and continues to accumulate reserves. The exception in the group is Peru, where partial dollarization in the economy has led the central bank to sell U.S. dollars and loosen monetary policy through lower reserve requirements (instead of lower interest rates).

1. Policy rates: Historical table

*Blank places mean absence of monetary policy decision for the month.

** Numbers in red indicate rate cuts, in green rate hikes and in grey another monetary policy change different from interest rates.


2. Charts





3. Monetary policy in LatAm

Brazil - Copom: Extending the cycle

In January, the Brazilian Central Bank’s monetary policy committee (Copom) raised the benchmark Selic rate by 50 bps, to 10.50%. The decision was unanimous. The increase was larger than we and most market analysts expected (25 bps), but it was mostly priced in by future markets. In our view, the 50-bp hike was driven by higher-than-expected inflation in 2013 and by the need to put inflation on a declining path. 

The post-meeting statement included the phrase “at this moment” In the past, that expression signaled a change in monetary policy in the near future.

In the minutes of the meeting, released one week later, the Copom described a stronger and more volatile external scenario but a more favorable domestic outlook for inflation. Inflation forecasts went up, probably justifying the 50-bp hike in the benchmark Selic rate. The indication for future monetary policy steps, however, has not changed. Therefore, the Copom left open the possibility that it could still reduce the pace of rate increases in the next meeting, if the global scenario – reflected in the dynamics of the Brazilian exchange rate – allows. 

For now, we maintain our view that the Copom will reduce the pace of rate increases to 25 bps in its next meeting, raising the Selic to 10.75%. The lower-than-expected IPCA-15 inflation figure for January reinforces this view. The committee may opt for additional 25-bp increases in its following meetings, or even choose to keep the pace of 50-bp hikes in its February meeting, depending on the exchange rate dynamics and the upcoming inflation results.

Mexico - Balance of risks worsens, but no tightening bias

As widely expected, Mexico’s central bank left the policy rate unchanged in January, at 3.5%. In the press statement, the central bank did not sound alarmed over growth in spite of the weak activity readings seen recently. In addition, the board highlighted that the balance of risks for inflation has deteriorated, due to potentially higher global market volatility and possible second-round effects from the recent increase in headline inflation. Still, the central bank did not introduce a tightening bias. In the concluding remarks of the statement, the central bank pledged to carefully monitor the domestic economy, the potential second-round effects of the increase in headline inflation and the monetary policy stance of Mexico vis-à-vis the U.S., just like in the previous few decisions.

We don’t expect Mexico’s central bank to raise rates any time soon (we see hikes only in 2015), even though we are expecting a significant rebound of the economy this year induced by higher U.S. growth. In our view, there is enough slack in the economy to absorb higher growth without leading to demand-side inflationary pressures. In addition, Mexico has dealt with many inflationary supply-shocks without having to raise rates to avoid second-round effects, and we do not think that this time will be different. The central bank, however, seems aware that the very low current policy rate is something exceptional, only possible because of very loose global monetary policy. Thus, a normalization is only a matter of time. As Mexico generates more consistent growth, volatility associated with the removal of monetary stimulus abroad may trigger the normalization sooner than we expect.  

Chile - Reinforcing the easing bias

For the second consecutive month, the Chilean central bank left the policy rate unchanged in January. While the decision to hold rates was in line with both our and market consensus expectations, some analysts expected a 25-bp cut. However, in the concluding remarks of the press statement the board explicitly said that a greater monetary stimulus will likely be necessary within the next few months to ensure that inflation remains at 3% in the relevant monetary policy horizon. This is a far more determined easing bias than the central bank was showing before the decision.

The minutes of the meeting later revealed that the decision to hold rates was unanimous. They also revealed that the board unanimously agreed to signal that an additional monetary stimulus will likely come in the near future. When board members debated the policy options, it became clear that the key reason behind waiting a bit more to resume the easing cycle was the unwillingness to surprise markets, which would potentially trigger an undesired drop in the interest rate curve.

In our view, the board is a bit uncomfortable with providing stimulus to an economy in which consumption continues to be robust, supported by tight labor-market conditions. But the very weak recent IMACEC readings (the monthly proxy for GDP) are clearly dominating attention now. We expect the central bank to resume the easing cycle in February. In our scenario, the central bank cuts the policy rate by 25 bps in the next policy decision and reduces it by another 25 bps until the end of the second quarter of 2014. Finally, we note that, at least for now, board members do not seem to be looking at volatility in global markets as a driver of domestic policy rates.

Peru - Easing through reserve requirements

The central bank maintained the interest rate at 4.0% in January, in line with our estimate and market consensus. In the press statement, the board argued that this decision is consistent with a CPI forecast of 2.0% within the relevant horizon (2014 - 2015). The central bank also cited the slowdown in local activity (led by lower exports), but it also mentioned that several economic indicators are consistent with a higher dynamism in 4Q13 (in line with the scenario outlined in its December Inflation Report). The board also said that it would consider a further easing in the monetary policy if it were necessary, confirming that there is still an easing bias.

Although the central bank left the policy rate unchanged, it continues easing monetary policy through reserve requirements. In January, the central bank reduced further the requirements for local currency to 13% (from 14%). Partial dollarization of the economy explains why the central bank is trying to deliver monetary stimulus without reducing the interest rate differential. Concerns over exchange-rate volatility also led the central bank to sell USD 1.04 billion in January from its reserves.

In our scenario, Peru’s economy will slow enough to convince the central bank to provide stimulus also through a lower policy rate. We expect two 25-bp cuts within the next months. However, we acknowledge that global market volatility must diminish before the central bank reduces rates.

Colombia - Unchanged rates, bias and exchange-rate accumulation policy

The central bank monetary policy committee decided to maintain the interest rate unchanged at 3.25% in January, as widely expected. The press statement suggests that the central bank is not planning any policy rate move soon. Furthermore, policy makers are still quite comfortable with the peso depreciation, so no news on the reserve accumulation policy was announced.

Following the announcement of the decision, the Central Bank Governor José Dario Uribe and the Finance Minister Mauricio Cardenas spoke to the press. Uribe noted that the decision to maintain the rate was unanimous while adding that the devaluation of the peso makes the Tradable sectors more competitive. Cardenas supported Uribe, acknowledging that the current peso exchange rate is “good news”, giving the government “enormous tranquility”.


4. Calendar of monetary policy decisions in February


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